Poor Math Skills Lead To Foreclosure ?
A new study purports to argue that people with poor math skills are more likely end having their homes foreclosed upon:
IF you can’t divide 300 by 2, should you qualify for a loan?
That is one of the questions raised by a new study led by a Columbia University assistant business professor, Stephan Meier, who found that borrowers with poor math skills were three times more likely than others to go into foreclosure.
Mr. Meier conceded that the results were not shocking, but he said he had not expected the connection between math skills and mortgage default to be so pronounced.
About 340 borrowers in Connecticut, Massachusetts and Rhode Island who took out subprime loans in 2006 and 2007 were surveyed in 2008. None were in foreclosure.
The respondents were asked five questions, with the first requiring borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000. (Since the survey was conducted by telephone, the questioners did not know who was using a calculator.)
About 16 percent of the respondents answered at least one of the first two questions incorrectly. Mr. Meier said that the results were consistent among all levels of education and income.
Over all, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter.
Mr. Meier said the fact that the borrowers in the sample had subprime loans — which in 2006 and 2007 were given even to those with dismal financial histories — did not lessen the significance of the findings. A larger survey in Britain, he said, found nearly the same levels of math illiteracy among those questioned about retirement savings.
Mr. Meier said the study had at least two implications for mortgage lenders. “Maybe start adding math tests to the process,” he said, “and screen them away.”
Now, pardon me while I point out at least three flaws with Mr. Meier’s study:
- It falls into the correlation/causation fallacy. The fact that people with poor math skills are more likely to default on their mortgages isn’t all that surprising once you consider the fact that people with poor math skills are also likely to be poorly educated in general, that poorly educated people are likely to have lower incomes, and that people with lower incomes are more likely to fall behind on their mortgages. Making the logical leap from “poor math skills” to foreclosure
- Meier’s decision to discount the fact that people in his survey had subprime loans seems to be a huge flaw. It’s exactly these types of people who are living on the financial edge to begin with, so it makes sense that they’d be more likely to default on their loans.
- Meier’s methodology is questionable. To be honest, if someone called me on the phone and asked me to do even the simple math that was included in this survey, I’d likely be a little put-off come up with a quick answer unless I had a pad of paper or a calculator next to me. Actually, I’d probably be likely to hang up on them.
What Meier’s study does point out, of course, is the need for more education about basic finance and what might be called real “home economics” in school, but that’s another story.